Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

This is the Full Question. There are not anymore details. Neighborhood Insurance sells fire insurance policies to local homeowners. The premium is $360, the probability

image text in transcribed
image text in transcribed
image text in transcribed
This is the Full Question. There are not anymore details.
Neighborhood Insurance sells fire insurance policies to local homeowners. The premium is $360, the probability of a fire is 01%, and in the event of a fire, the insured damages (the payout on the policy) will be $350,000 a. Make a table of the two possible peyouts on each policy with the probability of each, Outcome A: No Fire Outcome B: Fire! Payout b. Suppose you own the entire firm, and the company issues only one policy. What are the expected value, variance and standard deviation of your profit? Standard Deviation Expected Return Variance c. Now suppose your company issues two policies. The risk of fire is independent across the two policies. Make a table of the three possible payouts along with their associated probabilities. (Round your "Probablility" answers to 4 decimal places.) Outoome: One Fire Outcome: No Fire Outcome: Two Fires Payout Probeblity d. What are the expected value, variance and standard deviation of your profit? d. What are the expected value, variance and standard deviation of your profit? Standard Deviation Expected Return Variance e. Compare your answers to (b) and (d). Did risk pooling increase or decrease the variance of your profit? the total vanance of profit Risk pooling f. Continue to assume the company has issued two policies, but now assume you take on a partner, so that you each own one-half of the firm. Make a table of your share of the possible payouts the company may have to make on the two policies, along with their associated probebilities. (Round your "Probability" answers to 4 decimal places.) Outcome: One Fire Outcome: Two Fires Outcome: No Fire Payout Probability g. What are the expected value and variance of your profit? Standard Deviation Expected Return Variance

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Securitisation Derivatives A Practioner's Handbook

Authors: Mark Aarons, Vlad Ender, Andrew Wilkinson

1st Edition

1119532272, 978-1119532279

More Books

Students also viewed these Finance questions

Question

=+(16.32) 81(w) for w A and 0 Answered: 1 week ago

Answered: 1 week ago